Yeah, people were saying the same thing 3-4 years ago when they were getting ARM loans for houses - interest rates won't go up...I'll save some money...I don't want to pay the premium...I'll refinance, etc. etc. etc. And look where that got people.

Now is the best time to get a low APR fixed mortgage.

About 8 years ago we took a 5/1 ARM partly based on Dave's advice that it would be better in the long run. Our loan has caps we can live with. It's one of the best financial moves we ever made. The interest rate just keeps going down.

Thanks Dave!

Indeed. The hyper-inflation will come later.

Hi krycek,

Yeah, people were saying the same thing 3-4 years ago when they were getting ARM loans for houses - interest rates won't go up...I'll save some money...I don't want to pay the premium...I'll refinance, etc. etc. etc. And look where that got people.

Uhh... lower rates (they have dropped in the last 3-4 years)???
Deeper savings?
Faster elimination of debt?
Faster accumulation of free equity?
Avoidance of foreclosure?
Avoidance of bad credit from default?

If anyone got WORSE than this over the last 3-4 years, it wasn't from the cheaper rates they were paying.

Dave Donhoff
Leverage Planner

Hi Susan,

Thanks Dave!

You're absolutely welcome!

Of course, "make hay while the sun shines!" Take maximum advantage of your privilieged interest savings to accumulate as much as you can into working growth capital. The faster you eliminate all consumer debt and reach the point where your growth funds CAN match & pay off your mortgage balance, the sooner you have reached the "debt free" breakthrough point. A true level of discretionary financial FREEDOM!

You go girl!
Dave Donhoff
Leverage Planner

The fact of the matter is that banks love ARM's because you take on the interest rate risk instead of the bank. It's a raw deal. Sure it works out when interest rates are low but when they go back up, which they inevitably will (maybe not this year or next...but they will), people will be caught holding the bag.

Interest rates are lower than they will be in most of our lives. To ME that means it's the best time to secure a fixed-rate mortgage at the lowest possible APR. Why should I take on the interest risk? Let the bank take the interest risk.

Like I said, because interest rates are so low right now, there's no where to go but up. And sooner or later, they will. The mortgage is 30 years, not 2 years. Who knows what will happen in that 30 years. It wasn't too long ago that interest rates were in double digits.

And you can't count on refinancing out of the ARM any more due to the declining/stagnant home values.

You are a financial advisor and you have clients and you and your clients may be very happy with the financial products you recommend or offer. But what I'm saying is that most people would be best off with a traditional mortgage right now - right now is not the time to be taking on *more* risk!

Hi krycek,

You may be very well correct for people who don't save, typically overspend, and aren't very concerned or serious about their money. These are the folks who *NEED* to listen to the beginners messages by the likes of Suze Ormond & Dave Ramsey. Paying the more expensive premium for a 30 FRM is a good thing for the "minimum payment, set it & forget it" crowd.

I always advise folks that;
The SAFEST and FINANCIALLY SUREST strategy is to accumulate a Mortgage Freedom Account (safe, liquid, compounding growth funds) that you can CHOOSE to use to wipe out the entire mortgage balance all at once when you are ready.

Earning a safe compounding return that outperforms the tax-deductible costs of mortgage leverage is not difficult *IF* you match timeframes (i.e. don't try to match the costs of 30 year leverage with 6 month or 12 month deposit commitments. Long term matches long term, etc.)

Of course, once you have reached this point, you also have the power & discretion to safely "let the mortgage balance ride" with absolutely no risk (since you can stroke a check to wipe it out at will) while you continue to earn more in compounding growth than you pay in tax-deductible interest (not to mention the insurance premium savings you get when you have plenty of cash & can take larger deductibles.)

A 5 yr ARM is going for 2.75% currently (no buydown points.)
A 30 FRM is going for 3.875% currently (no buydown points.)

That's a 40% cost PREMIUM for anyone taking a 30 FRM.
If you did nothing but took the savings and applied it to principal (the least effective strategy... but still,) *AND the interest rate market went "limit up" (meaning it adjusted as high as legally allowed each year after the fixed period,) you would STILL pay less with the 5 yr ARM than the 30 FRM for at least 7-8 years.

If the interest rate markets do *ANYTHING* milder than the absolute catastrophic worst... you save with the 5 yr ARM deeper, and longer... allowing you to apply that savings to debt elimination and safe, liquid savings the entire time.

For *MOST* of my clients, I can design a plan that will allow them to retire all their debt (consumer *AND* mortgage) in 9-10 years, even if they are paying the premium on a 30 FRM. If we go with the 5 yr ARM savings instead, we can often retire all debts in 5-7 years.

(OH... and that is WITHOUT reducing their lifestyle budgets... no distasteful "belt cinching" required, assuming responsible folks in the first place.)

IMPORTANT NOTE: FannieMae bond data (in their SEC reports) whow that 19 out of every 20 mortgages are paid off due to refi or re-sale by just UNDER the 7th year. Since the 5 yr ARM (in a WORST CASE situation) is better for 7-8 years, THAT MEANS that 95% of the people who pay a premium for the 30 FRM are flushing that extra money down the toilet... all because of emotional fear, or lack of understanding.

DISCLAIMER: although I do provide this for my clients... I also teach the principles in various posts & responses here for everyone, for free. Those who "get it" either apply it for themselves, or they contact me... and I love it just as much when folks tell me of their successes from reading my works as I do when they hire our firm.

The better you understand the realities of money, interest rates, protective periods, protective caps, and the realities of the bonds markets (which tell us indisputably how frequently loans turn over,) the better you can get out of debt, and into financial freedom.

Cheers,
Dave Donhoff
Leverage Planner

I need advice. We bought our home 5 years ago on a 5year interest only JUMBO arm because my DH was being relocated by his company every 3.5 years and it never made sense to get a 30 year fixed. With the economy - no more relos. The arm expires soon. As a matter of fact we will get the new rate on Oct 20 and it will go into effect January 1st.

We have our current home on the market but we are in a fairly dead market and have had only two showings in the four months it's been on the market. We don't HAVE to sell but since our oldest left for college a few months ago, it's just more house than we need.

If we were going to stay here we would definitely go with a 30 year fixed but because we would like to downsize we are planning on another 5 year arm. Not interest only though.

Is this a mistake?

Hi Homeagain,

Are you asking if taking a 5 yr ARM is a mistake?
Did you read this thread? (Just curious.)

What did you think about what you read?
Dave Donhoff
Leverage Planner

ARM aren't scams, but I think Dave is considerably overselling the option.

There is no crystal ball to tell the future. Rates may stay low for a considerable period of time, or Bernanke might be lying, or more likely, not in a position to follow through on his suggestions. He's a political appointee and might not survive the next election cycle.

ARM's carry a risk. Everyone should know that by now. They also carry an upside - lower interest. Anyone considering a mortgage should run the numbers both ways and see what makes most sense for them.

If a borrower is disciplined enough to use the upside of ARMs (freeing up cash now) to minimize the downside (by paying off debt so you have less money exposed to changing interest rates) then they can be a fine product. However, it just hasn't been working out that way for most americans. In general, people saw the lower monthly payment and jumped at it. They spent the extra money on consumer goods. If they are one of the unlucky many who had their home values drop so much that they are now underwater, they are really stuck right now. They likely can't sell or refinance and are just keeping their fingers crossed that rates stay low until home values recover.

Now, none of that is the ARM's fault just like it isn't a credit card's fault that people charge too much. However, they do provide an extra chance for people to get in over their heads with debt.

As for the best way to get financial freedom - about 10% of it is knowledge and the other 90% is desire. The bankruptcy courts of people who thought that they could come up with magic bullets instead of a simple, disciplined plan. To get out of debt - it's simple. Spend less and pay off your debtors are quickly as possible. The more cash flow you can put towards debt repayment, the faster it will go. If you don't owe money, you don't ever have to worry about interest rates.

I'm sorry I wasn't clear and I did read this thread with interest.

I had planned to re-fi with a 5 year arm. Since we have our home on the market I considered shortening that even more to 3 years but with the current glut of foreclosures out there we might be better off taking our home off the market and trying again later.

However, with the rates being even lower now than they were 5 years ago the interest rate will most likely drop (it's 5%) but because the current loan is interest only the monthly payment will still increase.

So, yes I was asking if the 5 year arm was a mistake but meaning as opposed to just keeping our current mortgage. Our monthly payment will increase by several hundred dollars per month while we try to sell our home as opposed to paying re-fin closing cost of several thousand up front but have a somewhat lower payment.

Hi Homeagain,

Ahhh... I see.

OK, you need to pull out your "Note" to see what your;
A) margin is, and
B) your adjustment caps.

The fact you had a 5 yr ARM JUMBO means you had a higher initial rate than conforming... however, Jumbo ARMs do not typically have any higher MARGIN (which is what matters when the loan goes adjustable.)

Further, if your caps are 5-2-5, or 6-2-6, you'll get a much deeper initial drop in rate than if their are 2-2-5, or 2-2-6. (The first number is the cap on the allowed adjustment the very first year it goes adjustable, the middle number is the subsequent annual limitation, and the last is the grand total lifetime accumulative adjustment cap.)

I would rather doubt that you can refinance to a new 3 or 5 yr ARM and actually save very much relative to the payment (and especially the actual interest costs) you'll have by simply allowing the existing financing to drop to its adjustment. Short-term rates are low, and very unlikely to rise any time in the near term, so you'll likely be just fine while waiting out for a sale.

Another thing to remember is that if you have your home LISTED, most lenders won't allow you to even apply until the home has been taken off the market at least 6 months. There are a small handful (maybe 2 or 3) wholesale lenders I know of (meaning you'd have to access them through a broker) who allow an application one day after the home has been removed from listings, and the listing contract formally cancelled (which always serves to scare & p-off your realtor® who is counting on your home selling to make their commission.)

If you can shoulder the potential increase in monthly payment when the loan stops its interest-only treatment and begins amortizing... at least you can rest assured that the increase in payment (actually more than just the increase) is actually going right back into your pocket as accumulated real estate equity.

That's very likely the best way for you to proceed from here.

Hope that's helpful! Need any more guidance, just let me know.
Dave Donhoff
Leverage Planner